Thursday, December 22, 2016

Philippines holds rate, inflation risks remain to upside

The central bank of the Philippines left the interest rate on its benchmark overnight reverse repurchase (RRP) facility at 3.0 percent as inflation is expected to slowly return to its target range in 2017 and 2018, but omitted the previous reference for the need for "prudence in policy settings" due to increased uncertainty over the prospects for growth and monetary policy in advanced economies.
However, Bangko Sentral ng Pilipinas (BSP) added that it had taken into consideration the impact of changes to U.S. monetary policy on global financial markets and decided that maintaining its policy setting would give it more time to "assess evolving economic developments and calibrate its policy tools as appropriate."
The central bank, which lowered the RRP rate by 100 basis points in June as part of shift to an interest rate corridor system, said the overall balance of risks to inflation remain tilted to the upside, a slightly more hawkish view than in September when it said that inflation risks appeared tilted to the upside. In August the BSP described the inflation risks as "broadly balanced." Inflation in the Philippines rose to a 2016-high of 2.5 percent in November from 2.3 percent in the two previous months but on average the central bank said inflation this year would be below its target range of 3.0 percent, plus/minus 1 percentage point. Inflation is expected to rise to the target range in coming years due to higher oil prices and strong domestic activity, with the pending petitions for changes to electricity rates and the impact of the government's fiscal reform program posing upside risks. But uncertainty surrounding the global economy pose downside risks, the BSP added. In a separate statement, the central bank said the government had maintained its inflation target of 3.0 percent for the years up to 2019-2020. The Philippine peso fell sharply from September to late November and since then it has been more stable. Today the peso was trading at 49.94 to the U.S. dollar, down 6 percent this year.The economy in the Philippines grew by a stronger-than-expected annual rate of 7.1 percent in the third quarter, up from 7.0 percent in the second quarter and the BSP expects domestic demand to remain firms, supported by "solid" household spending, higher government spending and adequate domestic liquidity.
Bangko Sentral ng Pilipinas issued the following statement:

"At its meeting today, the Monetary Board decided to maintain the interest rate on the BSP’s overnight reverse repurchase (RRP) facility at 3.0 percent. The corresponding interest rates on the overnight lending and deposit facilities were also kept steady. The reserve requirement ratios were likewise left unchanged.

The Monetary Board’s decision is based on its assessment of inflation dynamics and the risks to the inflation outlook over the policy horizon. Latest baseline forecasts indicate that average inflation would likely settle below the target range of 3.0 percent ± 1 percentage point for 2016. However, inflation is seen to return gradually to a path consistent with the inflation target in 2017-2018 due to higher oil prices and strong domestic economic activity.

The overall balance of risks surrounding the inflation outlook also remains tilted to the upside, owing partly to the pending petitions for adjustments in electricity rates as well as the initial impact of the government’s broad fiscal reform program. Increased uncertainty in global economic prospects, meanwhile, continues to pose a key downside risk to the inflation outlook. Nevertheless, inflation expectations remain broadly consistent with the inflation target over the policy horizon.

The Monetary Board also stressed that domestic demand conditions are likely to stay firm, supported by solid private household spending, higher government expenditure, and adequate domestic liquidity. In addition, the Monetary Board has considered the potential impact of the ongoing monetary policy adjustment in the US on global financial market conditions. The Monetary Board also noted that maintaining monetary policy settings at this juncture will give the BSP more time to assess evolving economic developments and calibrate its policy tools as appropriate.